Does Vertical Interlock Benefit Shareholders? Evidence after Related Party Mergers and Acquisitions

ABSTRACT This study investigates the impact of vertical interlock in its listed company’s shareholder wealth. This simultaneous appointment of directors to both listed companies and their parent companies is a common practice in many emerging markets. Whereas vertical interlock is designed to enhance control and coordination, it may also enable controlling shareholders to expropriate minority shareholders. Using a sample of Chinese listed companies from 2007 to 2022, we find that the vertically interlocked companies are more prone to engage in related party mergers and acquisitions. Moreover, these transactions lead to lower buy-and-hold abnormal returns subsequently, suggesting that the vertically interlocked directors have facilitated shareholder expropriation through related party mergers and acquisitions. Further empirical analyses consistently indicate that such mergers and acquisitions are characterized by features of minority shareholder expropriation, with the likelihood of expropriation increasing when interlocked directors hold more senior positions within the parent companies. JEL Classifications: G340; M120; G30.